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Barney Frank vs. the Federal Reserve

As the monetary policy making arm of the Federal Reserve, the Federal Open Market Committee (FOMC) is meant to review economic conditions and determine the course of policy while considering the risks to price stability and economic growth.

To do that, the 12 member Committee meets eight times a year. At those meetings, the members give their views of the economy and make recommendations on the direction of policy. Then they vote.

Barney Frank wants to change that.

Specifically, Frank wants to strip the voting rights of some of the 12 FOMC members. The Committee is made up of the Board of Governors (there are 7), the president of the New York Fed, and the remaining 4 seats rotate yearly among the regional Fed bank presidents.

What Barney Frank doesn’t like is that the regional Fed presidents are appointed by a board of business leaders. That means that the regional presidents are “part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate”, according to Frank’s position paper. And Frank thinks it is “highly likely” that “their voting presence on the Committee has the effect of skewing policy”.

They are ‘skewing policy’ by having an opinion. Frank’s assertion is based on the fact that in the past, dissenting votes at FOMC meetings generally came from regional presidents. And for that reason their presence is a “significant constraint” to policy making.

He would rather see an FOMC made up of members that are appointed by the President and confirmed by the Senate; currently only members of the Board of Governors are selected that way. And he is currently working on a bill aimed at just that. It will be a revised version of legislation he introduced back in May that was met with criticism, and still has no co-sponsors.

Frank’s plan is the ‘democratization’ of the FOMC. Giving Washington the power to select the entire FOMC sounds to me more like the politicization of the Committee. The whole point of the structure of the Fed was to ensure that policy decisions are independent of political influence.

But more than that, being selected by the private sector means that the regional presidents bring an outside perspective to the Committee. And eliminating that would only serve to narrow the scope of the FOMC.


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